You should read this article even if you have already made a Loan Modification request to your bank and are still awaiting “their answer”. It is important to understand the success likelihood of your request, independent if you are current with your payments, not making current payments, or in arrears more than 60 days. If you have already received a Notice of Default, the filing of a Loan Modification request doesn’t automatically stop the Foreclosure process.
Here is the little known secret that homeowners only usually learn about after they have been denied their loan modification request or short sale approval. It is the NPV test (Net Present Value). This test is seldom revealed by the lenders on their web sites or in the information packets they provide when you ask for a loan modification application.
The NPV test is a financial model used by lenders to make decisions. Mortgage servicers use an NPV test to decide which action is more profitable (or less unprofitable) in the long run for them. In brief it tells them what is in their best interest, to modify, to deny, to accept short sale, or to foreclose. It is to your advantage to have an idea of the likelihood of a successful modification from the start.
So here is best way to start. If you want to get a loan modification on your mortgage, you first have to pass the NPV test. You will need to complete the NPV using the information you gathered for the original loan modification request. You can go to the official government website www.checkmynpv.com to see how you will potentially be evaluated. This free web site is overly simplistic but is a start. You can also obtain a more detailed analysis free of charge by going to www.help2012.info.
The NPV calculation makes assumptions about several things:
- How many months are likely to pass, on average, before a redefault
- How likely the borrower is to catch up on the payments if the loan isn’t modified (the “self-cure rate”).
- How much the home is worth now?
- How much the home will be worth a year from now?
- Months to complete an REO sale.
- How much it would cost — from legal fees to utilities – to foreclose and take possession of the house.
- How much the house would yield the lender in a foreclosure sale, using a formula that the government calls the REO discount?
For two of those items — the home’s projected value in a year and the REO discount — the servicer must use formulas crafted by the federal agency that oversees Fannie Mae and Freddie Mac. The servicer assigns its own values and probabilities to the other items. (REO stands for real estate owned, which is how a property is identified after it goes back to a mortgage company.
The test is filled with unique data (not publically made available), but the grading is simple: You either pass or fail. Pass and you are offered a modification of your mortgage, thereby modifying the loan and accepting lower monthly payments. Fail and you don’t get a loan modification leaving you with likelihood of foreclosure, or if you act quickly, possibly a short sale option
By way of summary, knowing expected results of your loan modification ahead of time allows you more time to establish alternative plans for your family’s housing. Completing the NPV Test and either obtaining a Pass or a Fail is only an indication of outcome, it is not definitive, and should not deter you from making every effort to stay in your home. If you have already been denied a loan modification and you haven’t received a detail of the NPV you should immediately contact your lender and obtain it, then re-verify the information they used versus the information you submitted. Many times errors are made and you may have a basis to request reconsideration.
Written by Harvey Brate, partner in the financial solutions firm of Van Bratt & Ynez, LLC, email address is HCBrate@gmail.com, or telephone number 866-382-9639 ex 104
